Green bonds, transition to a low-carbon economy, and intertemporal welfare allocation: Evidence from an extended DICE model

Orlov, S., Rovenskaya, E. ORCID: https://orcid.org/0000-0002-2761-3443, Puaschunder, J., & Semmler, W. (2024). Green bonds, transition to a low-carbon economy, and intertemporal welfare allocation: Evidence from an extended DICE model. AIMS Environmental Science 11 (4) 628-648. 10.3934/environsci.2024031.

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Abstract

Short-term reductions in social welfare, expected to be caused by a currently imposed carbon tax, are among the obstacles to a rapid transition to a low-carbon economy. Using an extended DICE model, we studied the potential of green bonds to both accelerate this transition and smoothen welfare losses and gains in a socially optimal way. We showed that green bonds can indeed accelerate the transition to a low-carbon economy and that lower interest rates on bonds speed up this acceleration. Moreover, bonds can reduce short-term welfare losses; however, to eliminate welfare losses, additional compensation mechanisms are needed. For example, bonds at a 3% interest rate can decrease the peak atmospheric carbon concentrations by about 20% and shorten the initial time, during which society is worse off from 75 to 45 years. Retaining at least the same consumption level as in the no-mitigation scenario, without using bonds, is possible only through a decrease in abatement efforts. Green bonds of sufficiently low interest rates allow improving intertemporal welfare as well as achieving a more pronounced climate change mitigation with respect to both mitigation and no-mitigation scenarios without bonds.

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